Excerpt:.....calcutta, on lease from karnani properties ltd. at the time of taking the property on lease by the assessee-company, the ground floor of the building was already in occupation of two tenants. after renovation of the building, the assessee let out the entire ground floor to the allahabad bank on a monthly rent of rs. 5,000. before the ito, the assessee claimed that the income derived from the said property should be taken as business income. the ito in the assessment order framed for the assessment year 1973-74 has noted that the assessee-company is only a sister concern of karnani properties ltd. with some common directors. most of the shares of the karnani properties ltd. are held by the karnani investment (p.) ltd., its managing director and his wife and that most of the shares of the.....

Judgment: 1. In all these appeals filed by the department, the only ground taken assails the finding of the Commissioner (Appeals) holding that income from leasehold property at 57, Park Street Calcutta is assessable as profits and gains of business and not as income from other sources under Section 56 of the Income-tax Act, 1961 ('the Act').

2. The assessment years with which we are concerned in these appeals are 1973-74 to 1978-79. The assessee is a limited company. During the previous year relevant to the assessment year 1973-74, the assessee took house property at 57, Park Street, Calcutta, on lease from Karnani Properties Ltd. At the time of taking the property on lease by the assessee-company, the ground floor of the building was already in occupation of two tenants. After renovation of the building, the assessee let out the entire ground floor to the Allahabad Bank on a monthly rent of Rs. 5,000. Before the ITO, the assessee claimed that the income derived from the said property should be taken as business income. The ITO in the assessment order framed for the assessment year 1973-74 has noted that the assessee-company is only a sister concern of Karnani Properties Ltd. with some common directors. Most of the shares of the Karnani Properties Ltd. are held by the Karnani Investment (P.) Ltd., its managing director and his wife and that most of the shares of the assessee-company are held by the Karnani Properties Ltd., its managing director and his relatives. In view of these facts, the ITO was of the view that it is wrong to hold that the income from the leasehold house property of the assessee has any character of business income. It was also mentioned in the assessment order that the assessee has no general business of taking houses on lease and letting them out.

So, the ITO considered the income from house property under the head 'Income from other sources'.

3. The matter was carried in appeals before the Commissioner (Appeals) for all the six assessment years under consideration. It was pointed out that the leasehold property in question is not a single unit but consisted of three units including the first floor unit, which has been let out to the Allahabad Bank. It was urged that the investment was made with borrowed money and that the leasehold property was a dilapidated one and was renovated and improved before being let out, or in other words, commercially exploited to make it a profitable proposition. It was further urged that these activities were organised activities and could only be described as business activities which could enable the assessee to earn income from rent which was nine times the rent before the property in question was taken over. It was also stated before the Commissioner (Appeals) that the expenditure on the improvement of the building alone came to Rs. 1,62,566 and that the expenditure was spread over for a period of three years. It was also contended that it was a well settled law that even a single plunge in the waters of trade could render such action as a business venture and, hence, the finding of the ITO that there was no continuous activity and, hence, no business activity could not stand. It was further urged that the company's taking over of the leasehold property and letting it out to different tenants after extensive renovation and improvement constituted a business activity. It was also pointed out that an activity which might not constitute business if carried on by an individual, would amount to business in the case of a company. Reliance was placed on the decisions of the Supreme Court in Lakshminarayan Ram Gopal & Sons Ltd. v. Government of Hyderabad [1954] 25 ITR 449, Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 and S.G.Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700.

4. The Commissioner (Appeals) found strength in the assessee's contentions. The Commissioner (Appeals) examined the memorandum of association of the assessee-company and found that the company is empowered to purchase, to take on lease or to exchange or otherwise acquire any land or building, etc., which the company might think necessary or convenient for its objects or incorporation. It was further found that in the agreement with the lessor company, the assessee is empowered to rebuild or renovate the existing structure or to construct a substantial building on the property in question. The Commissioner (Appeals) also found that the property taken on lease is not one unit but three units and that renovation and repairing work has been undertaken at a large cost and that the property has, therefore, been let out in different portions to different tenants. From all these facts, the Commissioner (Appeals) came to the conclusion that the taking of the property on lease and subletting portions of the same is a part of the business activity of the assessee-company and, hence, the income derived from the property should be taxed under the head 'Profits and gains of business or profession'. It was further held that the ITO was not justified in resorting to the residuary section and taxing the 'income from other sources' under Section 56. The ITO was, accordingly, directed to recompute the income from the leasehold property as business income. Aggrieved by the decision of the Commissioner (Appeals), the department has come up in separate appeals for all the six assessment years under consideration.

5. The learned departmental representative submitted before us that the Commissioner (Appeals) was wholly in error in holding that the income from the leasehold property is business income and should be assessed as such. It was urged that the ITO was fully justified in view of the facts and circumstances of the case in taxing this income under the head 'Income from other sources' under Section 56. Elaborating, it was urged by the learned departmental representative that in the instant case, the assessee-company did not carry on any continuous and organised activity while earning income from the leasehold property and that no services were rendered by it in that connection. It was further submitted that in this case the property was sublet by the assessee-company to only one tenant, namely, the Allahabad Bank and that the ground floor was already in occupation of other tenants at the time when the property was taken on lease. It was, thus, urged that it was a case of an isolated transaction and this does not constitute a business activity on the part of the assessee-company. It was further urged that the property was exploited by the assessee-company as a lessee and not as a trader. It was also pointed out that the memorandum of association of the assessee-company does not empower the assessee-company to commercially exploit any property taken on lease or otherwise. The learned departmental representative cited various authorities before us in support of his contentions. The relevant cases cited before us are Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765, Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 and Kamani Properties Ltd. v. CIT [1971] 82 ITR 547, all decided by the Supreme Court.

6. The learned authorised representative for the assessee has, on the other hand, fully supported the decision of the Commissioner (Appeals) which, according to him, is in conformity with the facts and law. It was submitted before us on behalf of the assessee that the three different portions of the property taken on lease by the assessee-company are in occupation of three different tenants. It was admitted that at the time, when the property was taken on lease by the assessee-company, the ground floor was already in occupation of two different tenants who now paid Rs. 1,000 and Rs. 50 per month as rent.

It was submitted that the building in question was renovated with money borrowed from the Allahabad Bank and that after incurring substantial expenditure on renovation, the first floor of the building was sublet to the Allahabad Bank on a monthly rent of Rs. 5,000. It was further urged that previously the building was yielding income of Rs. 1,010 per month and that after it had been taken on lease and subletting by the assessee, the rental income increased to Rs. 6,050 per month. It was also argued that the activities undertaken by the assessee-company after taking the property on lease amounted to commercial exploitation of the building as a trading asset and, therefore, rental income is assessable as business income and not under Section 56. It was also urged that a solitary transaction may constitute a business. It was also pointed out that the renovation of the building was done according to the needs of the Allahabad Bank. Besides placing reliance upon the authorities cited before, the lower appellate authority, the learned authorised representative for the assessee has also cited before us the case of CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596 (SC).

7. We have carefully considered the rival submissions as also the facts on record. We have also gone through the paper book filed by the assessee as well as the various authorities cited before us. The facts about which there is no dispute in this case and which have a bearing on the controversy between the parties are that the building in question was taken on lease by the assessee-company from Karnani Properties Ltd. After taking the property on lease, the assessee-company carried out. renovation and repairing work at a large cost as has been found by the Commissioner (Appeals). The ground floor of the building was already in the occupation of two tenants at the time when the building was taken on lease by the assessee and after renovation and repairs, the first floor was sublet to the Allahabad Bank. Before the property had been taken on lease, the ground floor was yielding a rental income of Rs. 1,010 per month and after the property had been renovated and sublet to the Allahabad Bank, the total amount of rent received by the assessee-company was Rs. 6,050 per month. At this stage, it would be appropriate to discuss the authorities cited by the parties.

8. In Narain Swadeshi Weaving Mills' case (supra), it was held by the Supreme Court that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principle. In that case, the assessee-firm carried on the business of manufacturing ribbons and laces and for that purpose it owned building, plants, machinery, etc. Later on the firm's business had entirely closed. It no longer manufactured ribbons and laces. It had no further commercial or trading activity. A public limited company hired the building and machinery from the assessee-firm. In view of the facts of that case, it was held by their Lordships of the Supreme Court that it is impossible to hold that the letting out of the building, plant, machinery, etc., was at all a business operation.

9. In Sultan Bros. (P.) Ltd.'s case (supra), the assessee, a private limited company, constructed a building on a certain plot of land, fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. It was held by their Lordships of the Supreme Court that whether a particular letting is business has to be decided in the circumstances of each case. It was observed in that case that covenants in the lease do not at all show that the lessor was rendering any service in the hotel business carried on by the lessee or in fact doing any business at all.

On the facts of that case, it was held that the letting of the building did not amount to doing of a business.

10. In Karnani Properties Ltd.'s case (supra), the assessee-company owned house properties, properly known as Karnani Mansion in Park Street, Calcutta. The said Mansion consisted of numerous residential fiats and over a dozen shop premises. All those were let out to different tenants. The tenants in respect of each of the flats and shops let out had to make a monthly payment which included charges of electric current, for use of lifts. For the supply of hot and cold water for the arrangement of scavenging, for providing watch and ward facilities as well as other amenities. It was found that the services rendered by the assessee to its tenants were the result of its activities carried on continuously in an organised manner with a set purpose and with a view to earn profits. Hence, those activities were considered as business activities.

11. In Lakshminarayan Ram Gopal & Sons Ltd.'s case (supra), it was held by the Supreme Court that the activities which constitute carrying on of business need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of a profession or vocation. They may even consist of rendering services to others which services may be of a variegated character. It was further observed that the consideration which applied in the case of individuals in the matter of determining whether the activities constitute a business within the meaning of the inclusive definition thereof may not apply in the case of incorporated companies. It was found in that case that the work of management done by the appellants consisted of numerous operation and comprised of various services which were rendered by them as agents. It was held that the activities of the appellants as the agents constituted a business and the remuneration received by them under the terms of the agency agreement was income, profits or gains from business.

12. In Karanpura Development Co. Ltd.'s case (supra), the assessee was a company formed with the objects, inter alia, of acquiring and disposing of underground coal mining rights in certain coal fields. The assessee-company acquired coal mining leases which were then sublet. It was held that the transactions were in the nature of trading within the objects of the company and not enjoyment of property as land owner. It was observed by their Lordships of the Supreme Court that ownership of property and leasing it out may be done as a part of business, or it may be done as a land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is 'Income from properties (section 9), even though the company may. do extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as land owner but as a profit.

13. In National Storage (P.) Ltd.'s case (supra), the respondent purchased a plot of land at an approved place and constructed thereon godown for the storage of films. There were 13 units, each one of which was divided into four vaults having a groundfloor for rewinding of films and an upper-floor for storage of films. The assessee not only constructed vaults of special designs and special doors and electric fittings, but it also rendered other services to the vault holders. It installed a fire alarm and was incurring expenditure for the maintenance of fire alarm. Two railway booking offices were opened in the premises for the despatch and receipt of the film parcels. The assessee also maintained a regular staff. On these facts, it was held in that case that the assessee was carrying on an adventure or concern in the nature of trade.

14. The assessee has placed great reliance on the case of S.G.Mercantile Corpn. (P.) Ltd. (supra). In that case one of the objects specified in the memorandum of association of the assessee-company was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially [emphasis supplied]. The company took on lease a market place. It was given the right to sublet different portions. The assessee's activity during the period covered by the assessment year 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shopkeepers, stall holders and daily casual market vendors.

It was held by their Lordships of the Supreme Court that all these facts point to the conclusion that the taking of the property on lease and subletting portions of the same was part of the business and trading activities of the assessee. It was further held that the paramount consideration which would weigh is whether the acquisition of the property was by way of investment and whether the property was let out because of the assessee having a title in the same or whether the acquisition and letting out of the property constitute the business and trading activity of the assessee. The question as to whether the above activity is being carried on by an individual or a company also have some relevance.

15. A copy of the memorandum and articles of association of the assessee-company has been placed before us. The objects for which the assessee-company was established were; inter alia, to purchase to take on lease or in exchange or otherwise acquire, any land, buildings, easements, rights, privileges, patents, inventions, machinery, plant, trade-markets, stock-in-trade and other articles and things of every kind and description, which the company may think necessary or convenient with reference to any of these objects or the acquisition of which may seem calculated to facilitate the realisation of any securities held by the company or to prevent or diminish any apprehended loss or liability and to sell, lease, mortgage or otherwise dispose of the property, assets or undertakings of the company or any part thereof for such consideration as the company may think fit. It is, therefore, noticeable that the memorandum of association of the assessee-company does not empower the assessee to commercially exploit a property taken by it on lease. On this ground, the case of S.G.Mercantile Corpn. (P.) Ltd. (supra) heavily relied upon by the assessee is clearly distinguishable. Further, in that case, different portions consisting of shops and stalls as well as ground space were let out to shopkeepers, stall holders and daily casual market vendors. In the instant case, after the property had been taken on lease and renovated its first floor was sublet to the Allahabad Bank. No other sub-tenant or sub-lease was inducted into the building by the assessee. True, a single transaction may amount to business activity if the circumstances of the case so warrant. In the instant case, no continuous or organised activity was carried on by the assessee with view to earn profits. Also no services were rendered by the assessee-company which may lead to the inference that it is engaged in an activity which may be characterised as a trading activity, aimed at earning profit and exploiting the property as a business asset. As has already been noted above, the assessee-company is not empowered by the memorandum of association to deal with the property commercially. So in view of the facts and circumstances of the case, we come to the conclusion that subletting of the property was not done by the assessee as a part of business but it was done merely as a lessee. The mere fact that the property was renovated and repaired at a considerable cost cannot legitimately lead to the conclusion that the activity undertaken by the assessee is in the nature of trade or business. As a lessee, the assessee was interested in renovating carrying out repair works so that the building could fetch a higher rent. This activity on its part is consistent with its status as a lessee. Even after subletting the first floor, the assessee was never engaged in any continuous or organised activity with a view to earn profit and as has already been pointed out above, no services were rendered by it. For all these reasons, we hold that the Commissioner (Appeals) was wholly in error in holding that the income derived from the building falls under the head 'Profits and gains of business or profession' and not under the head 'Income from other sources'.

16. For the foregoing reasons, the orders of the Commissioner (Appeals) are set aside and those of the ITO are restored for all the assessment years under consideration. In the result, the departmental appeals succeed and are hereby allowed.